The Economics of Chicken Feet… and Other Parts

Our latest podcast, “Weird Recycling,” featured Carlos Ayala, the Vice President of International at Perdue Farms. Stephen Dubner‘s interview with him centered on chicken feet — or chicken paws, as they’re called in the industry. Until about 20 years ago, paws were close to value-less for a U.S. chicken company. But thanks to huge demand in China, paws have become big profit centers. The U.S. now exports about 300,000 metric tons of chicken paws every year. Perdue alone produces more than a billion chicken feet a year, which according to Ayala brings in more than $40 million of revenue. In fact, Ayala says that without the paw, chicken companies would be hard-pressed to stay in business:

DUBNER: Okay. So take me back a little bit, however many years we need to go back to the time before there was a robust export market. Where would those billion plus, if there were that many then, feet be going?

AYALA: So, they’d go to rendering. And it might end up in dog food or something like that. But certainly not for human food. And then in 1991 we started harvesting paws in our first plant and it’s actually a huge upgrade, so, using opportunity costing, and the alternative is almost zero, the upgrade is tremendous. In fact it’s one of the more profitable items for a chicken company right now, are the paws.

DUBNER: And what was the general feeling within Perdue about this idea of creating an export market for… I can tell by the look on your face that it wasn’t greeted with open paws.

AYALA: It’s not going to work! (laughs)

DUBNER: Yeah.

AYALA: Yeah, the idea that we are going to spend a lot of money in infrastructure for the feet? I mean, you know, what are you thinking? But it has turned out to be one of the most profitable items that we have. In fact there’s a lot of chicken companies that would be out of business if it wasn’t for the chicken paws.

DUBNER: Is that right. Perdue included?

AYALA: Um, it would be very difficult for us to survive without chicken paws.

The chicken business has always been a high-volume, low-margin industry. So a few years ago when costs started to rise, mostly due to competition for feed corn from the ethanol industry, chicken companies got squeezed. Ayala writes via email:

With so many chicken companies operating right at the brink, exporting paws for such high prices really does make a big difference to our bottom lines. Thankfully, paw exports are a win/win: The Chinese get more of what they love and we get the employment and profits from a part of the chicken that otherwise wouldn’t have much value.

Even with the paw, some companies have had a hard time staying afloat under the pressure of rising costs and sluggish demand. In 2008, Pilgrim’s Pride, then the country’s largest chicken producer, declared bankruptcy. I spoke with former CEO Buddy Pilgrim, who said that Pilgrim’s Pride started exporting paws to China back in 1995. In just a couple years, the paw went from a niche item to an essential part of the business:

A few years back, only a handful of companies were selling paws into China. Now, everybody does. That tells you how efficient this industry is — when something drives down costs and drives up revenue, you have no choice but to do it; otherwise you don’t survive.

I also spoke with Wally Thurman, an agriculture economist at N.C. State, who’s done research on the economics of chicken wings. Just as Americans prefer turkey breast, we are also fond of chicken breast — but chicken growers can’t produce breasts without all the other parts. Historically, this led to a glut of wings; but recently, demand for wings in the U.S. has risen, and sohas the price, as you can see from the following graph that Thurman put together. It shows the price ratio between wings and breasts, based on USDA monthly wholesale data. Notice how the volatility appears to be seasonal. The green lines mark the month of October — which Thurman refers to as the Football Effect.

It’s not the sales — it’s the profit. Given that all the profit on a chicken used to come from just the breast meat, and the cost of complying with health and safety regulations, I’m not surprised that the margins on chicken feet enables a company to stay in business.

Beef skirt used to be a low value meat because it was very tough. Usually it was ground into hamburger. Very cheap in south Texas it was valued as something to grill instead of steak. Prices were very cheap per pound. Once it got popularized as fajitas the demand and price shot up. Now skirt (fajitas) is higher than sirloin most of the time. Marketing is the key.

Right you are, it cracks me up when I’m in the super market looking for some steak to grill for fajitas, hmmmm got skirt for 6.99 or more per pound, or london broil for $1.99 or New York strip for $5.99.

If I’m feeling thrifty I’ll buy the London Broil or I might simply forego the fajitas all together and grill a New York strip. Why anyone would pay 6.99 for skirt is beyond me.

So these seem great examples where people can see value where others see none.

A few years ago there was a contract let for the removal of rubble generated from a tunnel built under the Sydney Harbour. Most contractors proposed a “price to remove and dump” at (say) $50/tonne, but one company (Boral) quoted $25/tonne and installed a mobile crusher on site – loading the crushed rubble onto trucks and straight into their crushed rock business. Rather than incurring the cost of excavating from a quarry, they got paid for their feedstock!

Chicken wings were valueless until chicken wholesalers developed recipes that fast-food outlets could use. Chicken feet are just further down the food chain – wait until they get to beaks!